State ex rel. N.M. Attorney General, 27,833.

CourtCourt of Appeals of New Mexico
Citation145 N.M. 134,2008 NMCA 142,194 P.3d 749
Docket NumberNo. 27,833.,27,833.
PartiesSTATE of NEW MEXICO, ex rel. GARY K. KING, ATTORNEY GENERAL of the State of New Mexico, Plaintiff-Appellant, v. The AMERICAN TOBACCO COMPANY, INC., et al., Defendants-Appellees.
Decision Date03 September 2008

Gary K. King, Attorney General, David K. Thomson, Assistant Attorney General, Santa Fe, NM, for Appellant.

Brownstein Hyatt Farber Schreck, P.C., Adam E. Lyons, Albuquerque, NM, Howrey L.L.P., Robert J. Brookhiser, Elizabeth B. McCallum, Washington, D.C., for Appellee Subsequent Participating Manufacturers.

Montgomery & Andrews, P.A., Sarah M. Singleton, Santa Fe, NM, for Appellee Philip Morris USA, Inc.

Rodey, Dickason, Sloan, Akin & Robb, P.A., Andrew G. Schultz, Albuquerque, NM, for Appellee R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co.

OPINION

BUSTAMANTE, Judge.

{1} This case is one among many suits filed across the nation by state attorneys general regarding a comprehensive settlement agreement into which the states entered with various tobacco manufacturers. The settlement agreement requires the manufacturers to make annual payments to the states in exchange for a release of state claims against the manufacturers. However, the settlement agreement provides the manufacturers with a payment offset when an independent auditor determines that certain conditions are met. A dispute arose between the states and the manufacturers regarding whether the manufacturers were entitled to an offset for the calendar year of 2003. New Mexico (the State) filed suit in state district court seeking a declaratory judgment that the manufacturers were not entitled to the offset. The manufacturers filed a motion to compel arbitration pursuant to the settlement agreement, and the district court granted the motion. The State appeals that decision of the district court. We affirm.

BACKGROUND

{2} In 1997, the State, along with most other states, filed suit against various tobacco manufacturers. The State sought, among other things, damages for the manufacturers' acts that resulted in deleterious health effects on New Mexico residents. In 1998, the State and 45 other states, the District of Columbia, Puerto Rico and four territories (the Settling States) entered into a Master Settlement Agreement (the MSA) with certain manufacturers known as "Original Participating Manufacturers" (OPMs) that resolved the litigation. The MSA provides that OPMs and any "Subsequent Participating Manufacturers" (SPMs) agree to significant restrictions on the marketing of their products and to make annual payments to the Settling States in return for a release of state claims relating to the use or sale of the OPMs' and SPMs' (collectively, the PMs) products.

{3} Under the MSA, an independent auditor (the Auditor) determines the amount the PMs must pay to the Settling States annually. The PMs do not make direct payments to individual states, but instead make a single payment that the Auditor allocates among the Settling States. The Auditor also determines whether certain conditions exist that entitle the PMs to a payment reduction or elimination for a given year. Those conditions include: (1) the market share of "Non-Participating Manufacturers" (NPMs) increases more than two percent from the base year of 1997; and (2) an independent economic consulting firm determines that the MSA is a significant factor contributing to the PMs' market share loss (and NPMs' market share gain). If these conditions are met, the MSA requires the Auditor to apply the reduction (NPM Adjustment) to the allocated payments of all Settling States. However, an individual state can retain its portion of the allocated payments by demonstrating that it "diligently enforced" a statute imposing similar payment obligations on NPMs (a Qualifying Statute).1 When a state satisfies the diligent enforcement exemption, and thus retains its portion of allocated payments, the Auditor must reallocate the NPM Adjustment payment reduction among those Settling States that do not meet the exemption.

{4} In March of 2006, the Auditor concluded that the PMs were not entitled to a reduction for the calendar year 2003 based on the above factors. Although the Auditor found that NPM market share had, as a result of the MSA, increased sufficiently to grant an NPM Adjustment, the Auditor applied a legal presumption that the Settling States diligently enforced their Qualifying Statutes. The PMs disputed the Auditor's denial of an NPM Adjustment and sought arbitration of the matter pursuant to the MSA's arbitration clause. The State, like many other states, refused to submit to arbitration and instead filed a complaint in the district court seeking a declaratory order that the State's payment allocation for the calendar year 2003 is not subject to reduction. Although the State acknowledged that the underlying dispute regarding the NPM Adjustment is subject to arbitration under the MSA, the State maintained that the discrete issue of its diligent enforcement of its Qualifying Statute involves a question of law that only the district court can decide.

{5} The PMs filed a motion to compel arbitration, which the district court granted. The district court concluded that the plain language of the MSA requires the parties to resolve the dispute in a single, nationwide arbitration before three former federal judges. The State appeals that decision and presents two issues for review: (1) whether the district court erred in granting the motion to compel arbitration based on the text of the MSA's arbitration clause; and (2) whether the district court erred in referring the matter to a nationwide arbitration involving other states, as opposed to a local arbitration based in New Mexico. We address each of these issues in turn.

DISCUSSION
1. Standard of Review.

{6} We review a district court's decision to compel arbitration by applying "the same de novo standard of review used when reviewing a grant of summary judgment." Fiser v. Dell Computer Corp., 2007-NMCA-087, ¶ 6, 142 N.M. 331, 165 P.3d 328. "Interpretation of [an] arbitration clause [of a] settlement agreement is also a question of law subject to de novo review." Heimann v. Kinder-Morgan CO2 Co., L.P., 2006-NMCA-127, ¶ 9, 140 N.M. 552, 144 P.3d 111.

2. The MSA Requires Arbitration of All Disputes Concerning the Auditor's Allocation Determination, Including Disputes Regarding the Issue of Diligent Enforcement.

{7} The State disputes that the MSA's arbitration clause applies to the issue of whether the State diligently enforced its Qualifying Statute. The MSA's arbitration clause provides as follows:

Any dispute, controversy or claim arising out of or relating to calculations performed by, or any determinations made by, the Independent Auditor (including, without limitation, any dispute concerning the operation or application of any of the adjustments, reductions, offsets, carry-forwards and allocations described in subsection IX(j) or subsection XI(i)) shall be submitted to binding arbitration before a panel of three neutral arbitrators, each of whom shall be a former Article III federal judge. Each of the two sides to the dispute shall select one arbitrator. The two arbitrators so selected shall select the third arbitrator. The arbitration shall be governed by the United States Federal Arbitration Act.

MSA § XI(c). The State asserts that the arbitration clause has a narrow scope in that it is limited to disputes concerning the calculations and determinations of the Auditor that fall under the purview of the Auditor's accounting expertise. The State contends that the Auditor does not have the authority or expertise to make the legal determination of whether the State diligently enforced its Qualifying Statute, which is a matter subject to the jurisdiction of the district court.

{8} As support for its position that the district court has exclusive jurisdiction over disputes regarding diligent enforcement, the State cites Section VII(a) of the MSA, which provides, in relevant part, as follows:

Each Participating Manufacturer and each Settling State acknowledge that the Court: ... (2) shall retain exclusive jurisdiction for the purposes of implementing and enforcing this Agreement and the Consent Decree as to such Settling State; and (3) except as provided in subsections IX(d), XI(c) ..., shall be the only court to which disputes under this Agreement or the Consent Decree are presented as to such Settling State.

MSA § VII(a) (emphasis added). The State further cites Section VII(c)(1), which states:

Except as provided in subsections IX(d), XI(c) ..., any Settling State or Participating Manufacturer may bring an action in the Court to enforce the terms of this Agreement (or for a declaration construing any such term ("Declaratory Order")) with respect to disputes, alleged violations or alleged breaches within such Settling State.

MSA § VII(c)(1) (emphasis added).

{9} The State's citation to subsections (a) and (c) of Section VII of the MSA is inapposite. Neither provision makes reference to diligent enforcement, and both provisions specifically state that they do not apply to matters covered by Section XI(c). These provisions do not answer the question of whether Section XI(c) applies to disputes regarding diligent enforcement. To the contrary, the exception of Section XI(c) from the application of subsections (a) and (c) of Section VII, and the language of Section XI(c) itself, suggest that the parties intended that the arbitration panel have exclusive jurisdiction over "[a]ny dispute ... relating to calculations performed by, or any determinations made by, the Independent Auditor[.]" MSA § XI(c). The question we must decide is whether the dispute regarding the Auditor's decision not to apply an NPM Adjustment for 2003 falls within the scope of Section XI©.

{10} The State argues that Section XI(c) does not apply to diligent enforcement issues because the...

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